American universities have long been the envy of the world, with seemingly
bottomless purses to bankroll cutting-edge research, top-notch faculty and
construction projects galore. And fiscally speaking, these schools have it
better than most businesses in the U.S.: multiple sources of revenue,
including parents willing to pay tuition through the nose amid all kinds of
money trouble, have often kept these institutions insulated from economic
downturns. But in a financial crisis of this magnitude, even the ivory
towers are getting hit  and in more ways than one. Not only have Bank of
America, Citigroup and some two dozen other lenders cut back on or stopped
issuing student loans, but the market meltdown has left many colleges
scrambling to come up enough cash to cover payroll and other near-term
necessities.

Last week, nearly 1,000 colleges were told they couldn't access most of the
$9.3 billion sitting in a short-term fund that had been offering slightly
higher returns than U.S. treasuries. To prevent a run on the fund 12% of which was invested in mortgage-backed securities  the
fund's trustee resigned and froze withdrawals so it could liquidate the
assets and distribute the proceeds in an orderly manner. The same thing
happened to another 200 schools with $1 billion in an intermediate-term
fund. Given that the schools will get about half of their money by the end
of this year and the rest by 2011, there's a severe cash crunch for many
small schools, some of which had up to half their liquid assets in the
short-term fund.

Because these funds were terminated a few days before Congress passed the
mega-bailout bill, Minnesota's independent-college association sent a letter
to its Congressional delegates warning that without government help, some
schools would be unable to fulfill their payroll responsibilities this week.
"Any further delay by Congress or the administration," they wrote, "will
have immediate devastating effects on these institutions and the families
they serve." The American Council on Education sent a similar plea to every
member of the House of Representatives.

But even though the bailout has been approved, the financial future remains
murky, and some schools are already reporting cutbacks: Boston University
has called for a hiring freeze, while Grinnell College in Grinnell, Iowa,
plans to delay any further plans for new buildings or other capital
projects.

Universities with deep pockets, however, could stand to reap some benefits
from the downturn. Schools with enough financial security  from a solid
endowment or good planning or both  could attract more top students by
offering more aid to families that find their budgets stretched thin. Last
year, Grinnell expanded its financial aid program, which covers about 90% of
its students, to offer mostly grants instead of loans. That could give the
school a competitive edge  as long as it can convince parents to get
past the sticker shock and learn about the financial aid options that
sometimes make elite private colleges even cheaper than state schools. Ditto
for Hamilton College in Clinton, N.Y., where a $700 million endowment and a
budget designed ahead of time to accommodate a growing number of college
students (this year marks the demographic peak) will allow the university to
maintain its full financial aid program.

Still, Monica Inzer, Hamilton's dean of admission and financial aid, fears
recruiting top candidates may prove more difficult this year, in part
because of an increasing sense that college is just too expensive.
Admissions inquiries at Hamilton are down 2% so far this year, Inzer says,
(though part of the dip could come from students preferring to read online
brochures) and noticeably fewer students have been visiting campus. Where
students in past years might have applied to dozens of schools, this year's
prospective students may be targeting their inquiries more carefully; and
Inzer says parents are consulting financial aid counselors earlier in the
college-search season than ever before. "I think now people are saying,
'This is what we can afford, so before you get your hopes set on X College,
let's talk to them,'" she says. "We need to remind them how important
education is as an investment."

Some reforms are already underway to help parents understand that college
may be more affordable than they think. Education Secretary Margaret
Spellings recently unveiled a proposal to simplify the federal financial aid
process by shrinking the application form from 100 questions to 26 and
allowing students to find out before their senior year of high school how
much federal aid they would qualify for. Private universities are also
stepping up to the plate, increasingly offering such user-friendly options
as online aid calculators to give each student a personalized estimate.
Molly Corbett Broad, president of the American Council on Education, says
the down economy could accelerate such reforms, which could ultimately "go a
long way to demystify the cost of colleges."

Despite optimism in some corners, however, universities are cautious as they
survey the economic horizon. "In a huge downturn, everybody suffers
immensely," says Grinnell President Russell Osgood. "Those that are a little
bit better off will just be cushioned a little bit better at the front
end."